Abstract
This paper investigates the incentive systems and the hierarchical design of the Japanese firms as integral parts of employment structure. Using the survey cross-section data on job ranks and wages, we analyze the promotion policy and compensations system as the key incentive mechanism in these firms with highly developed internal labor markets. We find that the incentive as well as hierarchical structures of the large Japanese firms are highly sensitive to the longrun growth rates of these firms. This finding is supported by a prediction of a model of internal promotions developed in the paper. We also find that the span of control, incentive effects of promotion, and wage-age profile at each job rank are all increasing in the longrun growth rates of these firms. These findings are jointly consistent with and in support of the hypothesis that the expected gains from the promotion is the key incentive in inducing efforts of the employees.
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